Tuesday, July 6, 2010

Using "safety" to stifle competition

Did I mention that I follow tech news as well?

Go give a read over of this post at Techdirt. Its about economist Raghuram Rajan, author of the book "Fault Lines", who is pointing out how small incumbents in various industries being propped up by the government not only didn't help the industries in question but actually harmed local economies by artificially killing competition. His example is of the barber industry in Japan:
Let me give an example: Japanese haircuts are extremely expensive. Part of the reason is productivity in the Japanese haircut sector is lower. So, an upstart comes up and says 'I'm going to start offering cheaper haircuts.' That's the typical way that competition pushes down prices. If you have cheaper haircuts, more Japanese will go get haircuts, and there will be more activity in the haircutting sector and you will get growth there. Well, the startup provides cheaper haircuts, but the existing barbers get anxious, because they'll have to cut prices and they're perfectly happy where they are with fewer haircuts, but getting more per haircut.

And so the "barber's guild" gets together and says: 'This is terrible. You know, this practice of offering haircuts, we have to find a way to nip it in the bud." And they have a brilliant idea. They say: "Well, offering haircuts without shampoos is un-hygienic. It's a bad idea. So, we're going to mandate that before every haircut, you have to offer a shampoo." Well, the nice thing is that all of the existing barber shops are equipped with basins and so on where you can offer a shampoo. But that new startup, because it's cutting costs and because it's cutting frills, doesn't have a basin where you can have a shampoo.

Well, in one stroke, in requiring a shampoo before a haircut, you've raised the cost of doing business for the startup. You've driven the startup to a corner. And, typically, they can't compete any more. And you've preserved the way of life for the existing barbers. In the process, though, you've far fewer haircuts in Japan than if you'd allowed much more competition.

You can see this play out in many sectors: transport, retail, construction. Where a few incumbents sort of monopolize what's going on and don't allow the kind of growth that would allow Japan domestic sources of growth as distinct from the export-sources of growth, which it typically relies on.
As you can see the tactic is for the established members of the industry to appeal to the government to pass requirements for being able to participate in said line of work. The large established people can easily meet these new standards and remain in business while any small business just starting up will now run into additional startup costs which effectively raises the bar on starting up business to a higher level for no other reason than to keep out competition. And let's face it when it comes to big business (aka deep pockets) or the little guy/girl (aka empty pockets) which way to you think governments typically go?

This is pretty much what is going on with record companies and groups that push to get rid of file sharing (instead of figuring out how to use it to their advantage like some smaller time folks are figuring out). They aren't worried about the creators of music and their interests. No they just want to make sure they are the gatekeepers of music and that the money keeps flowing in their favor.

So be mindful the next time you hear of some industry people pushing for new measure that just happens to work to their own advantage.